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Steven Malanga
Bailouts for Cities? « Back to Story

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Seems like a pretty fair article. The mistake that Obama (and Bush) made with the banks was bailing them out and asking nothing in return. Banks didn't have to prosecute (or even fire) the people responsible, they didn't have to stop paying bonuses, they didn't even have to stop stealing, gambling, and bribing.

The results of the "no strings attached" bailout are obvious: Derivatives are still mostly unregulated. ( I am not saying we should have shut down every bank that was in trouble, but maybe we should at least shut off their allowance until they start cleaning up their rooms.)

When derivatives blow up next year, the bankers will do the same thing they did last time: Blame union workers in Detroit and Chicago. (For some reason, the news stations love this logic: We are horrified when a city worker in Chicago pulls down $95K, and completely unfazed by a banker who gets $95 million.)

But as the article mentions, bad financial management is not an act of God. Bankers and city managers did it for the same reasons: Stealing from pensions is amazingly profitable and mostly risk-free.

If cities are bailed out with no strings attached, there is every reason to expect they will behave exactly as the bankers did. Not only would they have no motive to fix their pension management, they would have no opportunity, either. Taxpayers aren't going to vote for pension reform any more than bankers voted for bank regulation.
Fortunately, actuarial tables and bankruptcy law are both well-understood art forms. If a city wants a bailout, they should have to submit to both actuaries and bankruptcy lawyers. In most major cities, that means the Mayor would be stripped of all decision-making authority until the city regains financial stability.
CEO’s all across America are familiar with the magic of Chapter 11: If you want to be treated like an adult, you have to act like one. And if you want dessert, you have to eat your veggies.
Here's a "solution" not just emotional venting. Ask retirees to reduce their defined pension benefits on the front end by 10%. Then on the back end of the contract insert a Cost of Living Adjustment (COLA) of only 1% per year. Then when 65 year old retirees get to 85 years old, and assuming inflation runs at least 2% per year, their pension benefit will be worth 20% less (uncompounded). So total pension reduction would be 30%.

Here's another hypothetical solution: have public pensioners sign over the future equity build up in their homes to the state upon sale in return for a guaranteed defined pension benefit. Structure it like a zero coupon bond.

These are solutions but I didn't say anybody wanted them.
Yeah, Detroit is JUST like Hurricane Sandy.... if the hurricane destroyed just a few feet of beach sand and a few dozen homes every month for the past 40 years to the applause of the local residents. Yeah, just the same.
Clearly the feds should not bail out cities but how do we know that they aren't somewhat bailing them out via backdoor methods? During the recession California was getting $1.45 back for every $1 they paid in federal taxes. And they owe the feds over $9 billion for a loan to fund unemployment payments. And the feds did give over $300 million to Detroit recently for "rehabbing". The House may be able to block naked attempts to bail out cities but Obozo and his minions have plenty of money in other agencies to divert.

The only solution is small govt.
Responding to justonekalpa,

We can make them pay by MATERIALLY reducing the pensions of those ALREADY retired. And if legal, by focusing (that giveback) on those no longer California residents.
Please remember that many if not most of the people who voted for the folks who negotiated these contracts left the cities years ago - after benefiting from the extra services but before the bills came due. If you want to be fair you need to track them down and make them pay too.
Steve, Your last paragraph sums it up well.

I don't support any Federal "bailout" because of the over-compensation of Public Sector workers (everywhere), primarily via grossly excessive pensions and benefits rather than materially excessive cash pay, and the insatiable greed of the Public Sector Unions/workers(and of course the complicity our self-interested, taxpayer-betraying elected officials in agreeing to them).

While I don't know what Mr. Riordan has in mind, any such Federal Guarantee (which clearly has little change of NOT leaving the Taxpayers picking up most of the bill) MUST include a reduction in these pension promises to a level no greater than what Private Sector Taxpayers get .... which means AT LEAST a 50% reduction from misc workers and more from safety workers with the most egregious pensions.

And as to your comment on the need for angry voters to ... " bring an end to the special interests' tight grip on the public purse".... a good start would be to end Collective Bargaining with Public Sector Unions, such Unions being nothing short of a CANCER inflicted upon society.
So the unions cut special deals, with Dem pols, that will destroy the city in the future but provide pols money to win elections --- and I am supposed to pay for the planned exercise of immorality when reality plays out? I guess this makes sense to Democrats but not to rational people.
The Fed bailout solution for cities doth smelleth like "Taxation without representation" to moi...
Reform of any substance will never happen as long as the Democrats and Government unions are given any say. Leeches looters one and all.
Most people do not know that JFK's EO#10988 began the fiscal rot that has overtaken U.S. city county state & federal government. EO#10988 allowed Federal bureaucrats to bargain collectively. Big labor union lawyers were not long in finding ways to use the same rule to organise city, county & state workers. AFSCME is the biggest union under Richard Trumka's AFLCIO umbrella. Trumka bailed out of organizing coal-miners and jumped into organizing government workers. That Big Labor organizing process has put the entire system of U.S. government at risk. It all started in 1962 with John Kennedy's Executive Order #10988.
I would be happy to bail any city out, in exchange for:

1) That city can no longer have public unions. They are banned, permanently, as part of the city charter.

2) Cap pensions at $60 k per year per person.

3) No employee can collect a pension before the age of 65. You can go ahead and retire early, just not collect.

4) You must collect your pension in person, every month, at a special city office in downtown. Must show ID to collect.

5) All future pensions are defined contribution, not defined benefit.

Break any of these rules, the city is dissolved and becomes a federal district, subject to the same rules.
Ban Defined Benefit Plans November 25, 2013 at 9:26 PM
While going through business school in the 80's it was well known that define contribution plans were the wave of the future in private industry retirement systems. So much so that Wall Street penalized companies severely in their stock price if they had defined benefit retirement plans. Everyone knew they defined benefit retirement plans could not be sustained over time.

If we bail out cities for their defined benefit retirement plans, then define benefit retirement plans must be banned.
At some point, it will be illegal for people to leave this country.
Steven Malanga, like many Californians, has an aversion to a brutally honest analysis of local governments – it avoids confrontations which residents of the Golden State much prefer. Consequently, little notice was taken by this author of the most obvious solution to Detroit’s financial problems – let Michigan bail out Detroit rather than raiding the federal piggy bank. Psychologically, the point of local government is local control over critical issues and there seems little reason to have a state government poised between the federal government and the cities if the states are only too anxious to dump their financial responsibilities onto another government entity.

From Grand Rapids to Traverse City to Escanaba, Michiganders don’t harbor much love for Detroit, many actively despise the City and its citizens. Michigan has also suffered considerably from the Great Recession over the last 6 years - but according to the Happy Talk Michigan Media all that is changing, the economy is reviving and the state has increased taxpayer wealth to dole out. Wayne State University in Detroit recently signed a deal leasing state owned land for a $60 million project to build an apartment/retail complex – however, all lease payments will be retained by the university, no money will go to save Detroit. But what would it take to convince Michiganders to bail out Detroit, to go into more long term debt, to forego state funds applied to various state wide projects and give those monies to Detroit?

Basically, it would take a miracle. Politicians love their elected positions and to suggest that Michigan has the sole responsibility to bailout Detroit is political suicide outside the Motor City’s borders. It’s easier to dump the problem on citizens from Bangor, Maine to Portland, Oregon, let them help with the bailout under the convenient swindle of federal funding.

Nor is Detroit surrounded by a ring of wealthy Republican suburbs as the mainstream media often hints. Racial problems may exist but the problems stem from the city/suburb people being more alike than different. The grandsons and granddaughters of staunch UAW and Teamster union members reside within various Detroit border suburbs such as Warren, Livonia and St. Clair Shores plus the downriver communities. The union mentality is alive and well within these enclaves and the idea of using their tax dollars to bailout Detroit is the last thing on their minds. Blue collar workers within the auto manufacturing and trucking industry were once the highest paid unskilled workers in the entire world, earning more than college graduates in most countries, including our own. Their short sighted stupidity and unabashed greed killed their local industries but the union entitlement mindset remains. Look for no generous financial support from Detroit’s suburban ex-patriots and their descendents.

The obvious question is why don’t the states bailout their financially troubled cities – isn’t it their responsibility first and foremost? The shoulder shrugs within the various state legislatures and governor’s mansions indicate the usual political fix is in – let other Americans solve their financial problems but don’t relinquish political control over their cities. Michigan has considerable wealth, so does Illinois – their politicians need to grow a backbone and demand their own citizens assume the financial burdens before other Americans are forced to contribute. Otherwise, they’re just another pack of cheap hustlers hoping the long suffering American taxpayers buy into their beggar’s logic.
this statement in the article in false “The 700,000 remaining residents of the Motor City are no more responsible for Detroit’s problems than were the victims of Hurricane Sandy for theirs, " the residents did cause the downfall of their city by voting in the PROGRESSIVE LIBERALS that have run their city to the ground, I do NOT support giving my hard earned tax dollars for people who put themselves in the place they asked for by their vote!!!!!!!!!
Progressives claim our massive federal debt is a "manufactured crisis." They also believe massive spending by the federal government acts as an economic stimulus. So my opinion is yes, the cities will be bailed out en masse by the taxpayers and anyone who dares complain will be labeled anti-American and a racist.
I am so very serious when I write this. As a 50 year-old who has never worked in a company larger than 30 employees, who has never taken one dime from the government in the form of contracts, "work" (in the loosest sense of the word) or outright welfare, and who is absolutely fed up with pulling the wagon.

My kids are no longer dependent, and I'm done. You can take it all from me, but I'm not working a day further to bail your asses out. If this is your plan, I'm scoring a bag, grabbing a 40 and sitting on the stoop next to you.

So move over, parasites. Here I come.
Yea where is my bail out for all these politicians who spent my taxes and now want more from me in this economy?
the difference is one was a disaster by natural causes; the other a disaster by human decisions.
Bailing out the cities will only enable and encourage the corruption and mismanagement. I would also like to correct a perception. In Illinois the pensions are in very big trouble which dates back to the 1970's. The state and city have deposited IOU's into the pension fund instead of making the legally required monetary contribution. The money that was contributed was squandered by politically connected companies that were hired to invest & manage. Most rank and file workers are not in line to receive 6 figure pensions, the annual amount is a lot closer to $50K for the vast majority. However there are a lot of politically connected double dippers. Retire from the city with a full pension and work 1 year for the state and receive another full pension. In Illinois, only the city of Chicago is responsible for its Teacher's pension. For the rest of the state, the State of Illinois is responsible. That led a lot of suburbs to negotiate lower salaries with primo pension benefits because someone else will foot the bill. The mess will have to be addressed and cleaned up but do not give massive amounts of whiskey to the drunks and expect sobriety.
Although I suspect Pat below is not a Detroiter (I am a former Detroiter and know the story very well) his anger and disgust are well placed. Detroit is nothing like a natural disaster and in fact Detroiters are free to move. I hate to say it but self-respecting Detroiters should summon the courage of earlier Americans who picked up stakes. Having said that, the state of Michigan is sovereign and has to take responsibility--not for continuing to pay bills with money that never existed--but for maintaining security in the city.
We have been an easy hit for bailouts since the Marshall Plan. Travel the world today, and witness the vile, cold hateful stare you get.
Put a cap on all taxpayer pensions at about 50 K
Include those who have multiple taxpayer pensions.
Cap the entire total at 50K.
Here in Massachusetts not so many years ago we had a State Rep from Whitman who refused his 14th taxpayer pension. He was almost shot to death. He said he had never earned in his life over 10K annually but his penisions added up to $187,000. Needless to say Massachusetts did nothing.
And who is going to bail out the Fed Govt, when it comes hat in hand??
I'm supposed to pay higher taxes to bail out a retirement plan that I can't even dream of, when all I have is a crappy 401K?
Where will this end? If Detroit gets fed money to pay of bloated retirement benefits, how can the fed ever say "No"? Government nationwide is broke, spent out from decades of buying union votes so the pols could hold their positions. The trough is empty - time for a diet.
Let 'em burn!!!! They did this to themselves.
Bailing out bad behavior just encourages more of the same behavior
Want to bail out broke cities? Come here to Cleveland and hold a rally in Public Square. Propose that we all vote to tax ourselves more and send the money to Detroit pensioners. It would be a toss up whether you were laughed out of town or left without your head.
Steven omits one other key point in his article which should actually be the first thing said to those who want federal bailouts of cities; the federal government is broke too. It doesn't matter who is blameless or to be blamed for the financial woes of each city, where exactly is the federal government supposed to come up with the money???
Sure, have the rest of America pay for the liberal workings in all cities. I live in the Kennett Square area , the mushroom capital of the world, and our population is about 50% Hispanic and 50% other. I pay around $7K per year in property taxes. I bought this house knowing the high tax, but did so any way. The point is why should I pay high property taxes to support my schools and county officials and also pay for other cities/states problems too? I didn't elect their officials, they did. And they should reap the consequences alone.
Everyone saw it coming, everyone published clever pieces predicting Detroit’s downfall, everyone was proven completely correct. The federal government stood idly by for decades and did nothing to discipline Detroit’s corrupt elected officials. The citizens of Detroit utterly failed to master the basic skills needed for self-government. In a participatory democratic system, their participation was worse than useless, it was motivated solely by personal greed and primitive self-interest.

But Detroiters are slyly skilled in matters of charity, they have to be since most of their decrepit economy is based on charity. And their present conclusion is that this is obviously another charitable fund raising event, only black ties and minks will be scarce along the formal reception line. At present, the City of Detroit is milking some 73 separate federal/state grant programs for money, money which the City never intends to pay back. A private foundation has even set aside grant money to study Detroit’s addiction to other people’s money – the problem being defined as how to efficiently beg for greater sums of money, not how to refuse charity out of stiff necked pride. As with all other simple municipal tasks, the Foundation believes the City of Detroit blew their chances at many additional free money opportunities and with a little attention to detail and a scientific approach to the problem, the begging process can be thoroughly streamlined and millions of additional dollars will flow into the City’s coffers.

Jesse Jackson and Reverend Al have been told to stay far away from the Motor City – now is not the time for the Angry Black Man lounge act. A white mayor was recently elected, first time in decades a white man has been Detroit’s mayor but it has nothing to do with the current bankruptcy we’re assured, it’s just a heartwarming example of how far race relations have come. Soon, the media interviews will commence, tears will be shed and “it’s not our fault!!” will be heard from the foot of Woodward Ave to the bleak winter landscape of Palmer Park. This is that perfect moment in time when the stage is set and the charitable prize, the hundreds of millions of dollars Detroit desperately needs, is at that perfect moment of ripeness and should be immediately picked.

The nation is about to witness an academy award winning performance in the art of begging, we’re about to see the “Helpless” and their law degree holding Advocates for Deserving Mendicants attempt to pick our pockets. There will be interview after interview of Detroiters, each with a sad tale – but there won’t be interviews with former Detroiters, those Americans who left the city in disgust and heartfelt gratitude for a successful escape. But if somehow former Detroiters were to be interviewed, their conclusion would be the same and universally expressed as: “What possible difference will it make?”. Detroit will remain a city of dysfunctional illiterates, a primitive, barbaric anomaly within a sophisticated high tech nation. Unemployment will continue at staggering rates, as will crime and single motherhood – nothing will change because Detroiters are incapable of healthy, self-initiated change.

Many wise Americans realize this conclusion is true, nothing will change for Detroiters – free money or no free money. Many emotional Americans will demand we save Detroiters from themselves. But such an emotional response solves nothing in the long run. Detroiters will remain a lifelong burden for taxpaying Americans, they’re the lazy brother-in-law who will never hold onto a job, who will always need to borrow a few bucks with no intention of repaying, the eternal charity case. I firmly believe the tired young waitress in Atlanta or the hardware store owner in Boise working long hours should be allowed to keep their hard earned money – giving it indirectly to Detroit and Detroiters is not an act of kindness. We’ve created the Palestinian refugee camp problem right there in the apple growing Mid-West. It’s time our politicians dealt logically with the problem in a straightforward fashion, creating perpetual mendicants and their offspring is kicking the can down the road and haven’t we done enough can kicking?
you want a revolution???? try to bail out a blue city or a blue state and watch the revolution as tax payers over run the capital. i think we have had enough of being lied to by the government and all their special perks and privilege. there will be a backlash, and while it will not be pretty the tax payers will rejoice.
"...what these nearly insolvent governments really need are voters angry enough—and worried enough—to bring an end to the special interests’ tight grip on the public purse."

Which only works today if each of these voters possesses a Time Machine that lets them go back to 1980.

That's so they can vote to limit their local pension systems.

And also vote to fight national policies that went limp rather than fight against de-industrialization and offshoring.

Doing this now is useless. Well, all but useless. The damage was done many years ago -- or steadily over 30 years and from the pro-American-investor treaties that killed our job markets.
I believe a famous politician once said "Elections has consequences." So suffer the consequences, big city fools.
If American taxpayers are expected to bail out retirement pensions, those pensions must by necessity be enjoyed by all Americans. Answer: fold those pensions into Social Security so the pensioners and all taxpaying Americans can look forward to a starvation-free retirement.
Voters have been voting for decades with their feet. All that is left in Detroit are the moochers.
I didn't vote for the mayor and city council in Detroit and Chicago, I shouldn't have to pay for their sins...

...trying to enforce "taxation without representation" on unwilling victims have historically led to bad doings in this country.
I think ObamaCare is a "bailout" designed to HIDE the FACT that Democrat Politicians and Union thugs, in alliance, has systematically bilked taxpayers for years until now most municipalities are bankrupt.

Next there will be a push to make a pension system "for everyone" where the Public Union worker can be dumped "along with the rest of us".

Democrat Pols have bankrupted the taxpayer with their money laundering scheme that funnels money TO UNIONS then into Democrat coffers. Now the promises made are coming due, Dems want to disguise the mess with these new "programs", they can't allow the taxpayer to see what they have done, the taxpayer MAY hold them accountable.
I'm afraid we will get bailouts when the proper course would be bankruptcy. There is a new Fed chair, and even though Mr. Yellen isn't as bold or brash as Summers, Obama might still be able to convince her to do QE with Municipal Bonds. It wouldn't be legal for the Fed to bail out cities, but I don't think anyone has the standing to challenge such an act in court either.
Pensions are the moment of truth. De-industrialization and offshoring produces an inevitable loss of living standards which was masked for quite some time by money games. When pensions come due, throughout the economy, there will be this choice: drastically impoverish old people (do nothing as in Detroit) or impoverish everyone through inflation (take over failing pensions).

The ongoing conspiracy against taxpayers is depriving taxpayers of income with which they could pay taxes.

Not to say that in some places, like Chicago, known for their dirty politics, the pension system might have gotten out of hand. I personally have no idea.
Yes, the federal government needs to intervene, because local politicians stole from their citizens and indebted them into indentured servitude. So what they should do, is abolish the government. Split up the city into much smaller cities. Promises like former city worker pensions should be eliminated.

It's them and their managers who didn't put aside their retirement funds and expected future taxpayers to pay them. Let them suffer, because they deserve it by foisting their retirements on taxpayers, without passing the taxes to pay for it when the obligations were created.

Why do they deserve to get something from someone they never served? They don't.

So Liberals destroy a nice city like Detroit -

and then want a do-over from Washington?????
“The 700,000 remaining residents of the Motor City are no more responsible for Detroit’s problems than were the victims of Hurricane Sandy for theirs, and eventually Congress decided to help them,”
The problem with this statement is that bailing out Sandy victims is also unconstitutional.

The late Alabama governor George Wallace once said, “There’s not a dime’s worth of difference between Republicans and Democrats.” Both Republicans and Democrats agree on taking our money. Where they differ is what to spend it on. A Democrat like Senator Edward Kennedy agrees to take our earnings and give them to cities and poor people. A Republican like Senator Elizabeth Dole agrees to take our earnings and give them to farmers and failing businesses. (Read the excellent article, How Did We Get Here? - When Legalized Theft Becomes Routine, It Pays for Everyone to Participate, July 6, 2010 by Walter E. Williams)

In 1794 James Madison, the acknowledged father of our Constitution, wrote disapprovingly of a $15,000 appropriation for French refugees saying, “I cannot undertake to lay my finger on that article of the Constitution which granted a right to Congress of expending, on objects of benevolence, the money of their constituents.” This vision was restated even more forcefully on the floor of the House of Representatives two years later by William Giles of Virginia, who condemned a relief measure for fire victims. Giles insisted that it was neither the purpose nor the right of Congress to “attend to what generosity and humanity require, but to what the Constitution and their duty require.”

In 1854 President Franklin Pierce vetoed a bill intended to help the mentally ill championed by the renowned nineteenth-century social reformer Dorothea Dix. In the face of scathing criticism, President Pierce said, “I cannot find any authority in the Constitution for public charity.” To approve such spending, he added, “would be contrary to the letter and the spirit of the Constitution and subversive to the whole theory upon which the Union of these States is founded.”

President Grover Cleveland was the king of the veto. He vetoed literally hundreds of congressional spending bills during his two terms as president in the late 1800s. His reason, as he often said: “I can find no warrant for such an appropriation in the Constitution.”

Many Americans erroneously believe that the Constitution’s “general welfare” clause serves as justification for congressional spending on anything that can muster a majority vote. That surely wasn’t the vision of the Framers. In 1798 Thomas Jefferson wrote: “Congress has not unlimited powers to provide for the general welfare, but only those specifically enumerated.” “Specifically enumerated” referred to the listing of congressional powers found in Article I, Section 8, of the Constitution. James Madison elaborated on this limitation in a letter to James Robertson: “[W]ith respect to the two words “general welfare,” I have always regarded them as qualified by the detail of powers connected with them. To take them in a literal and unlimited sense would be a metamorphosis of the Constitution into a character which there is a host of proofs was not contemplated by its creators.”
Fences around those cities NOW. With their treasuries fully looted, the parasites will fan out to the rest of the country to loot more cities if they are allowed to leave the desiccated shells of the cities they've already destroyed.
As in any bankruptcy, state and local governments must liquidate assets like land, airports, buildings. These mismanaged cities, counties and states are not "insolvent" as long as there are assets to cover the debt obligations. Municipal choices must have consequences.
WASHINGTON'S BAILOUT OF MUNICIPAL PENSION SYSTEMS MIGHT BE THE FINAL STRAW TO MAKE OUR ECONOMY LIKE GREECE Once the Federal government got involved in pension underfunding the National debt would double. Who would ten be there to bail out our Country the Chinese or would we face a massive reduction in our standard of living to accommodate higher taxes to pay off the debts.
No bailouts as long as GOP controls House and sequester stays in place.
Retired public service 'workers' deserve no bailout. They were notoriously over compensated and under worked throughout their careers.
Bejamin W. Hartley November 24, 2013 at 3:17 PM
Please tell me why I should contribute to the delinquency of adults in Chicago, Detroit, and Los Angeles, when I live and pay taxes in New Hampshire.
So the taxpayer is now supposed to institutionalize dangerous public union theft. The public union thieves just get away with their robbery. No thanks, they need a haircut and public unions should be abolished.
Here's a thought...nobody is ever responsible for anything. It all just happens. Nobody ever shot anybody. The gun always just went off.

But we who are called upon to make good on those broken promises and extravagant pensions? We're not responsible for our own refusal to be generous. We just can't help ourselves. We're naturally tightwads when we see people who appear to be at fault for their own predicaments, and what's more, appear to be determined to put yet more billions on the charge card the moment we pick up their curent tab.